Bishop Hill Shale gas getting cheaper
Sep 9, 2014 Energy: gas People like BNEF talk about UK shale gas being expensive and hard to extract, although they have not, to the best of my knowledge, ever published the report that they claim justifies their position. In the meantime evidence continues to surface that the technology of shale gas extraction is developing apace.
Just a year or so ago we were talking about breakeven points of $6 for most shale plays in the USA, but as Natural Gas Intelligence reports, US producers seem quite able to get product to the surface at prices below $5:
Fourth quarter prices are expected to average $3.85/Mcf versus a previous forecast of $4.70, with 2015 prices sliced to $3.65 from $4.25, and the long-term deck priced at $4.25 from $4.50. Analysts in May had raised the gas price forecast on the bet that prices would need to average $4.75 through 2014 to encourage enough gas-to-coal switching to hit a below-normal storage target (see Daily GPI, May 27).
"The reality is that U.S. gas producers are finding ways to bring online staggering amounts of natural gas at prices well below $4.50," wrote analysts J. Marshall Adkins and Edward Rowe. "More importantly, these lower gas drilling breakeven costs are likely to fall even further over the next few years as operators continue to drive better gas production efficiencies.
This is an odd thing to see if shale really is a Ponzi scheme and the operators are all trading at a loss.
Reader Comments (43)
But - hey - in the UK we've got WIND....
Er - alright, there isn't any at the moment, but there will be SOON, mark my words...
We've sometimes got wind, but always got Swampy and his pals, they clearly aim to make shale uneconomic in the UK via security costs.
The standard anti-fracking litany is a text-book example of kettle logic:
Just placed the order for next season's fertiliser. Cheaper again, this year. Thanks, shale!!!
And don't forget about condensates.
http://blogs.wsj.com/corporate-intelligence/2014/06/25/what-is-condensate-introducing-americas-new-oil-export/
Never underestimate the competitive nature of the industry, every cent is worth having and cents soon add up to dollars.
The break even price for horizontal shale depends on the formation drilled and ranges between about $4.5 and$6/ mcf.
It isn't just the drilling cost. Wet gas has to be stripped of NGL to make dry pipeline gas, in some places SO2 and/or CO2 removed, and then the gas piped to the main pipelines. Some of the major plays already have this infrastructure, like the Barnett. Others have to invest to create it, like the Marcellus.
The low prices below $4 are mainly a consequence of land leases containing drill by or lose it provisions. Given decline curves for the major plays, present oversupply should resolve itself in another year or so. Long term (2-3 years)prices should settle about $6 or so. Still low enought to cause continued switch away from coal and toward CCGT. Lower investment/MW, higher fuel efficiency.
The enviro-fascists cannot give fracking even the slightest endorsement. In a sensible world (the one most of us know we don't live in) where there was a reasoned, and reasonable, debate about climate change it would be welcomed by both sides in the debate.
With proper regulation, fracking has been seen to be completely safe and results in a significant lowering of CO2 emissions when gas replaces other fossil fuels for power generation. It also reduces energy prices. In other words, everybody wins thanks to the introduction of a clean energy source that meets the requirement for a reliable power source with reduced emissions. Therefore, fracking should go ahead regardless.
In the world we actually live in fracking is viewed by the greens, quite rightly, as a threat to their dream of zero emissions and a utopia of windmills and solar panels. They will not, and cannot, give an inch to fracking.
Shale can never be a Ponzi Scheme in two important respects.
First, there is something being produced with all that investment. When a Ponzi goes belly-up there is nothing, or very little, left. If a shale gas producer were to go bust there would still be production facilities producing gas.
Second, although some of the businesses may turn out to be fraudelent, the vast majority are legitimate, but high risk businesses.
Falling prices are a feature of any fast moving industry, such as PCs in the 1980s and 1990s, or the US oil industry in the the late nineteenth century. Like in those industries, most of the current players will be taken over or go bankrupt.
Some readers may not understand that much of the current shale-related natgas is produced as a by-product of oil production (currently oil is much more profitable than gas). So in North Dakota, in particular, natural gas is widely flared off. The State authorities don't much like this, and are pushing for more producers to link to pipelines, or compress the gas to tanks (difficult and limited). What it means, though, is that natural gas is available, in effect, for free to those who can figure out how to process it (see Rud Istvan's accurate comment above) and get it to a transmission facility. The availability of "free" natgas is what has acted to depress the price in the past few years.
In other shales, such as the Marcellus in Pennsylvania, the gas production outweighs that of oil, so the gas output is more sensitive to end-user price considerations.
There is every reason to expect that the same considerations will emerge in shale gas (and oil and liquids) production in the U.K. and elsewhere, thus leading to a spectrum of "break-even" prices, all of which are likely to be much lower than what U.K. users are currently paying for natgas.
Gas prices, cost to produce:
1. factor in existing infrastructure and facilities. The more of both, the less additional, if any, cost of production/transport/proceessing, as infrastructure and facility costs are UPFRONT and immediately impact profit indices.
2. factor in price of liquids. More liquids means more money on the liquid side: the costs assoicated with one are commonly shifted to the other so-as to make profitability look better for the weaker cousin.
The cost drop is still not enough to create DRY gas economics. Keep remembering that the liquid-load and pressures of the US situation is NOT the Brit situation. Here in Canada we have a number of dry gas plays, even liquid gas plays, that do not work, cannot be started, because the technology does NOT allow DRY or liquidl-poor gas plays to meet economics. So far Britain is a compressional basin, dry, shallow geological environment. Differrent, very different from the US.
I know you and the GWPF want to believe that Britain can be self-sufficient in natural gas, and for good reasons. And the Green technologies are stupidly expensive and ineffective. But do not allow yourself to be mislead. Look into the reports from the Geological Survey: they avoid like the plague discussion of recovery factors and liquid content, pressure comparisons and probable production rates. The discussion would not serve Cuadrilla or the Government well.
There are huge new gas-and-liquids plays coming on-stream in North America. Every one of them is from zones that were known to produce vertically on a limited basis. Horizontal drilling and fracking have joined what were small volumes of recoverable reserves at a vertical pool. The impact has been immense. But the conditions geologically are quite specific: high pressure, NGL rich and low water content. Look to historical, vertical gas pools that went for years at low rates. Britain is not without test drilling.
Something else: the modern - and what I have read about Cuadrilla - way of assigning recoverable reserves is to use a 40-year cumulative number. This is mathematically fine, but for an economic - not Soviet-style - project, you have to get your upfront costs back within 4 - 7 years, while paying for operational costs, of course. If you are in a long-term dividend mindset, you might say 10 years is okay, as long as you are confident that you'll still be producing well for another 30 years. But at the huge initial decline rates, perhaps 60% the first year and 20% per year for the next few, you really do need to get your money back quickly to continue with project development.
Again, I'm not trying to rain on your parade. But like Green technologies, horizontal and frack technologies have applications more limited than their effusive proponents like to say. And the backdrop has to be how fast you get back the money you put in for the first part of the project, for the rest of the project is paid for with the first part of the project or is internally subsidized even within the capitalist company model, by other projects.
Keep your eye on the pea. Brit gas will occur. But its widespread applicability is NOT similar to NAmerican experience.
What will you do Bish, when you go independent? You'll be able to focus all your attention on the SNP...bet that will make your life easier.
What is the real cost of shale gas?
Still my biggest selling post :-)
If the amounts are staggering then the price paid by consumers will be under a $. Go figure. The back side of Hubbert's peak is a cold place for capitalism.
Art Berman makes the case that low shale gas prices are a result of low interest rates, and that 7 USD is the true cost of much US production:
https://www.youtube.com/watch?v=DHkKa4Zj_94
Unless you have access to a specific companies exploration and production numbers then you do not have current numbers, just opinion and homogenized data.
Euan,
Your view of the world is less than half empty, if the industry had adopted your pessimism we would have been out of hydrocarbons decades ago. I spent 3 decades in the industry and really enjoyed destroying pessimists.
Free market forces will prevail, they maybe hindered by govt. interference but even that eventually will be defeated.
Why are the Greens so worried that these evil Capitalists might loose some of their money trying to get fraccing to work in England?
Is it that they are afraid that their windmills and solar panels will be shown to be a disastrous economic and environmental waste of money?
All that is needed are some test holes drilled. It isn't as though it has never been done before. There may come a time when having an indigenous fuel will be more important that the cost of producing it and, although the time isn't now, some information on what is possible would help in strategic planning. (Does anyone do strategic planning now?)
There are also the numerous experts who have been promoting green technology who mustn't lose face, including all our ministers of state at the DECC.
Also this the real near future for UK energy
http://www.worldcoal.com/news/coal/articles/Coal_discovered_in_North_Sea_674.aspx#.VA-K8fldUqw
I wish US commenters would distinguish between gaseous gas and gasoline in a way that is clear to speakers of English. Terms such as wet and dry gas mean nothing to me.
Diogenes,
Wet and dry gas refer to the products from natural gas production. "Dry" gas is mostly methane (C1), while "Wet" gas contains significant levels of ethane, propane and butane (C2, C3, & C4). The latter are much more valuable, since they can be used as chemical feedstocks and as high value condensable fuels. Methane is generally in over-supply while the others are what's driving the resurgence of the N. America chemical industry and directly compete with more expensive crude oil-based feedstocks.
"Gasoline" is only relevant to oil production, and the "Oil and Gas" market generally refers to petroleum and "natural gas".
John M, spot on. Thanks. I don't visit much more than once/day (if that) and did not realize the lack of understanding of basic energy terminology information out there. Else would have been more clear. Some here might benefit from ny forthcoming book of essays on enegy and climate, with a forward from Prof. Judith Curry since she has guest posted portions of 11 out of the 52. The energy half explains a lot of these issues in illustrated, laymen accessible detail.
BTW, the current 'relax oil export' debate in the US, as well as the 'train tank car safety' issue from Bakken 'oil' production are both specific to the natural gas liquids (NGL, mostly ethane, propane, butane, but even a little natural c10 gasoline) fractions now in US oversupply.
It will sort itself out. Massive investments take a few years to get going. Our US fracking party rocks on despite President OBummer.
Meanwhile the UK has two problems IMO.
1. Insufficient grid reserves for this upcoming winter thanks to idiotic renewable subsidy and pricing policies.. Suggest a stock of blankets, candles, coal/firewood, cash, and MREs in order to aurvive the inevitale rolling lackouts. STAT.
2. Putins hand on the European natural gas supply spigot . Suggest learning Russian, or how to frack. Either choice, please hurry.
Yanks are still rather fond of our old mother ship despite a tussle or two in 1796 and 1812. Regards from the New World.
The green mafia's war on fracking is proof positive of their bad faith. Fracking has been used successfully for over 50 years with no environmental problems. The green mob has had to lie and deceive more than on climate to get people buy into their false claims.
Mike Singleton,
I simply try to bring a real perspective. I have not heard the Bishop running around claiming that wind power is cheap. The Greens say that all the time when over-production dumps the price. Selling expensive energy cheap is not a good business model. According to my good friend Art Berman much of the shale gas boom was fueled by expanding debt to cover negative cash flows. How would any of this survive in a 10% interest rate environment? Shale oil is different, that makes money. The only way we were ever able to pay such high rents on money was through the huge energy surplus created from CHEAP fossil fuels. The energy surplus on expensive fossil fuels is much lower.
I had a commenter on my own blog promising 40,000 new jobs developing tidal power in the Pentland Firth. Well, we're already at renewables saturation point and so who needs a gigantic amount of renewable electricity twice a day, but at different times every day? 40,000 jobs tells you straight away this is going to be the most expensive electricity ever produced, will spread poverty and misery. As well sending folks out to gather sticks.
The Arguments for and Against Shale Oil and Gas Developments
Forgot to say that any pessimism would begin to melt away when ground is broken on Hunterstone C. A new 3.2 GW EPR in Scotland will go along way towards wiping out the need for renewables and unconventional FF.
Euan
It is governments that are to blame for the economically illiterate idea that creating jobs is a good thing per se. I hadn't heard the 40,000 figure you quote but I'm inclined to disbelieve it unless the company (?) is implying that all this extra energy being produced will cause that sort of an increase in productive business, which I doubt.
They are simply parroting the government mantra that more jobs is a good thing regardless of whether there is enough actual work to justify them.
The sooner people see through this particular piece of (highly dishonest) political spin, the sooner some genuinely useful jobs might actually be created with a commensurate increase in national wealth!
Rud Istvan says:
"It isn't just the drilling cost. Wet gas has to be stripped of NGL to make dry pipeline gas"
And NGL sells for a lot more than methane, so that´s hardly a cost driver.
IanH says:
"Art Berman makes the case that low shale gas prices are a result of low interest rates"
And would you please mention a commodity where interest rates do not affect prices?
Ian Proctor:
"Here in Canada we have a number of dry gas plays, even liquid gas plays, that do not work, cannot be started, because the technology does NOT allow DRY or liquidl-poor gas plays to meet economics"
That's because you are connected to the US gas pipeline system. If you were connected to the European pipeline network with European gas prices you could start up tomorrow.
You all know nothing and I refuse to believe anything until our resident expert on tracking has spewed forth is informed opinion. Where is EM when you need him!!!! :)
Regards
Mailman
Lots of confusion over the terminologies. Dry gas is methane - C1, and unlikely to occur alone. Wet gas will contain higher hydrocarbons collectively separated as natural gas liquids (NGLs) and, as separated from the (desired product) methane in their mixed state are unusable for anything. Ethane (C2) is in between. It can be left in the gas but only up to a point. It can be separated as a valuable petrochemical feedstock but only by "deep" recovery (turboexpander) and it has to be handled cryogenically - bit like LNG. The next higher hydrocarbons are propane (C3) and butane (C4) recovered by refrigeration only, either together (calor gas) or separately with many uses but they have to be kept under pressure to remain liquid. Heavier C5 and C5+ hydrocarbons are collectively referred to as "condensate" or natural gasoline and are liquids at normal temperatures and can be stored in ordinary tanks. Other "natural gasoline" up to C10 will occur in the light ends from petroleum refining but are unlikely to occur in natural gas in other than trace amounts. I have never encountered "dry" gas other than in coal bed methane, but that's only my personal limited experience. Lots of good stuff in the posts but its blindingly clear that the sooner a well is drilled fracked and tested the better and this circular discussion can be become focussed.
Doesn't a fairly sharp production decline profile ensure you get your money back quickly if it's economic to produce at all? That's exactly the economics of many GOM* gas fields - except that offshore it can cease being economic to produce a long tail because maintenance costs are high in a salty, hurricane prone environment - certainly if you have to keep a rig there.
*Gulf of Mexico
This is an odd thing to see if shale really is a Ponzi scheme and the operators are all trading at a loss.
How is it that people who are so careful reading reports that are produced by the IPCC and alarmists are so careless when it comes to reading material that they want to be true? The simple fact is that it is impossible to find primary shale producers that are generating positive cash flows from operations that are sufficient to close the funding gaps. I know because I have been looking for these companies for quite some time.
Before I go on, let me state once again that it is easy to prove me wrong. All readers have to do is look at the 10-K filings and show me companies that have not been using massive amounts of debt, equity issues, or asset sales to keep their operations going.
Note that one of the most hyped up companies, whose stock has been a wonderful speculation, Continental Resources, is looking at a negative cash flow of around $1.2 billion for 2013. While that is better than the negative cash flow of $2.5 billion in 2012, the company has been cash flow negative for the last five years that I looked at and does not show much of an increase in income for all of the investment that it is making. From where I stand I see a company that has to keep investing just to keep the depletion from showing up in its production data. And note that Chesapeake is toast. The previous poster child for shale investment has been bleeding cash for five years ($45 billion) as well but things are getting worse and worse even though the analysts are still bullish on the company. The company has sold off parts of itself and has entered into the agreements that will cause further problems down the road. Note that the Financial Times had a story a few weeks ago where it was predicted that the independent shale producers will finally generate an aggregate positive cash flow NEXT YEAR as long as prices hold up and interest rates don't go too high. But note that even if this were true it does not tell us anything about the shale model because of the massive depletion rate from the older, more productive wells, and the need to finance newer wells that are in marginal areas of shale formations.
That brings us to the production data. We know that sinceJune 2012 oil production in the Bakken has gone up by around 73%. The problem is that the number of operating wells has gone up by 90% and the daily production rate has fallen by 9% per well. Note what this data is showing us. Shale wells have their greatest production just after they are drilled. A production increase of 73% while the number of wells go up by 90% is pointing to a very steep depletion rate even if we assume that no wells have been shut down during the two year period. Given the massive depletion problem it is still looking as if the EURs that are being used to create the deprecation schedules are too high and that we are looking at a massive write-off in the sector some time in the next few quarters. While there are good areas and some companies that may be viable the shale model is a destroyer of capital.
VangelV says:
"Shale wells have their greatest production just after they are drilled."
Indeed they do. Ever heard of any oil well that didn't?
"since June 2012 oil production in the Bakken has gone up by around 73%. The problem is that the number of operating wells has gone up by 90% and the daily production rate has fallen by 9% per well."
Of course it has. At that time almost all wells were quite new. Now they are a mixture of new and older wells. By the way, the fact that production per well has fallen as little as 9% indicates that the newer well are more productive than the older ones were, as is also indicated by the fact that the amount of new production coming on line per drilling rig has been rising slowly in the Bakken.
TTY, fracked decline curves are fundamentally different than those from conventions reservoirs. If you knew that, you obfuscate. If you didn't, you spread misinformation. neither is good. learn first, comment later.
'tty' says:
"Shale wells have their greatest production just after they are drilled."
Indeed they do. Ever heard of any oil well that didn't?
No. But the daily production rates of normal oil wells do not decline by 60-75% in the first year.
Of course it has. At that time almost all wells were quite new. Now they are a mixture of new and older wells. By the way, the fact that production per well has fallen as little as 9% indicates that the newer well are more productive than the older ones were, as is also indicated by the fact that the amount of new production coming on line per drilling rig has been rising slowly in the Bakken.
But you are missing the problem my friend. In a conventional field doubling the number of wells would have had a much larger effect because conventional wells decline at a much lower rate than shale wells. To make things worse, conventional wells are very economic because the production rate stabilizes and that rate tends to be dependable for many years. The same is not true for shale wells. Not only do they deplete much faster their production rate does not stabilize for a very long period because there is very little pressure in a tight sand formation in comparison to the pressures in a conventional field.
I suggest that you look at the numbers. If we go back to 1999-2000 we see that the same number of wells tended to produce a very similar amount of oil each month because the daily production was quite low and the number of wells did not change very much as older wells got taken off line and newer wells took their place. The data shows that during some months the number of producing wells declined by 3-5% as older wells became too expensive to operate. Note that this was a time when wells were cheap to drill because operators went after the better locations where no fracking was necessary and the depths were reasonable. The most current data does not tell us how many wells were actually drilled and how many were taken off line. That makes the numbers actually much worse than they are for conventional oil and gas and even worse than they were for Coal Bed Methane. Do you remember the hype for CBM? I certainly do. But now that reality has set in there is no noise out of Wall Street analysts about the subject.
The simple fact is that the shale producers are using other people's money to make a very good living and will continue to do so until the funding becomes too big a problem and no greater fool is around to buy leases at ten times the original purchase price. With the hedges now wound down and no profit to be made anywhere other than tiny core areas that have nearly played out the future for the shale companies will be very bleak. And when the bubble pops what you and others are going to have to ask is what happened to your supposed scepticism and logic. If none of you can find independent shale producers who are self financing a decade after the 'revolution' why do you still have faith in people that cannot back their claims with empirical evidence?
'Rud Istvan' wrote:
TTY, fracked decline curves are fundamentally different than those from conventions reservoirs. If you knew that, you obfuscate. If you didn't, you spread misinformation. neither is good. learn first, comment later.
Careful my friend. We know that our alarmists friends want something to believe in when they cite the IPCC as fact even though the empirical evidence isn't there. Why would we expect climate skeptics to be rational in all other areas as well. They also want something to believe in even though it may not be supported by objective evidence or sound theory.
What I find frustrating is when some very brilliant people fall into the trap and start weaving narratives that support their beliefs rather than look coldly at the facts and use their ability to reason to come up with supportable conclusions. Not too long ago I got into a serious argument on this subject with a number of Austrian Economist types. After spending an hour showing how researchers can falsify some important myths just by getting out and doing some analysis in the real world they tried to argue that it wasn't necessary to check the facts for shale because we know that the Julian Simon thesis is sound. If the people who could see the NASDAQ and housing bubbles so clearly long before anyone figured out that there was a problem and the people who predicted exactly what would happen in the foreign policy sphere can get lazy and let their emotions and desires get in the way of reason why would we expect our friend to do better? The best that we can do is try to educate and spread the word so that others may avoid the consequences when the bubble bursts.
Rud Istvan says:
"TTY, fracked decline curves are fundamentally different than those from conventions reservoirs"
Yes, they tend to start as a hyperbolic curve and later shift to a exponential, since the low permeability of the reservoir means that the reservoir pressure never equalizes, and pressure gradients remain for a very long time. Essentially this means that shale wells decline faster than conventional wells at first and slower than a conventional well at a later stage.
This might be a little of topic but why is no one confronting the Scottish Green Party MSP Patrick Harvey for his support of Scottish Independence when it is predicated on getting every last drop of oil out of the ground, totally opposite to their overall view that it should all be left in the ground lest we burn to a crisp.
It never seems to occur to anyone at the BBC/ITV to point that out, but it's glaringly obvious to everyone up here in the North East. The Greens want Yes so badly. They can't wait to be bigger frogs in a smaller pond, or maybe get to hold the balance of power and subvert democracy like they did in Australia.
Bit off-topic but interesting: Brent Crude diving steadily below $100/barrel for the first time in the recent past....
Will we see it reflected at the pumps..? Nah - only increases when 'world price' increases - no mechanism for that working in reverse...
@sherlock1
Bit off-topic but interesting: Brent Crude diving steadily below $100/barrel for the first time in the recent past....
Will we see it reflected at the pumps..? Nah - only increases when 'world price' increases - no mechanism for that working in reverse...
I think that you are not accounting for the costs of producing fuel. The cost of oil is actually very small so a decline at the pump will be tiny in comparison to the price movement at the pump. If you want a reasonable price why not stop voting for politicians who see gasoline taxes as a way to fund all kinds of activities that have nothing to do with the costs of driving for the state. For 2014Q2 you are looking at around $2.18 per litre in the UK, with the biggest chunk of the cost being taxes. In contrast, Canadians, who also have a high tax government at both the federal and provincial level, were paying $1.19. At the same time Americans were paying on average $0.98 and American consumers were screaming about prices being too high.
Rud Istvan says:
Yes, they tend to start as a hyperbolic curve and later shift to a exponential, since the low permeability of the reservoir means that the reservoir pressure never equalizes, and pressure gradients remain for a very long time. Essentially this means that shale wells decline faster than conventional wells at first and slower than a conventional well at a later stage."
When shale wells get down to 5 bpd after a few years they can maintain that rate for a while. The trouble is that the total cost to lease the property, drill the wells, build the infrastructure, pay for the royalties, overheads, etc., is higher than the revenue that is collected. And that is why the industry lost $500 billion in the past five years. Note that this does not include the high cost of replacing and repairing roads that are ripped up by the drillers and other subsidies to the industry.
Keep in mind that the shale sector is treated very differently than the conventional players. It gets all kinds of exemptions and subsidies just like the alternative energy sector.
Euan M;
You mention Art Berman in your post above.
That caught my eye because I had just read your post about N. Sea fracking, carried on GWPF, where you also cite him: " I sent an email to one of my groups with a question on flow rates. Shale expert Arthur Berman replied: "Peak rates are about 500-600 bopd per well in the best fields."
That sits alongside a WSJ report, also on GWPF, on rising shale productivity quoting a peak flow of 2,750 bopd.
If memory serves, from the days when I used to read Nick Grealy's blog, Art B is a leading doom-monger on shale economics.
Is it possible that his views and figures are a bit pessimistic?
In my opinion, the shale gas will not become the ponzi scheme,because the technology of The United Stated is really higher than the other country in the world.On the one way, it want to control the price of the shale gas to reap the benefit of themselves.Of course the price of the shale gas is very expensive at the first, and now it's price down to a very low level, and the main factor may the cost putted in the early date is high.
okmarts